Understanding Perpetual Inventory Valuation System
Under Perpetual Inventory Valuation system, the value of balances is recorded after every receipt and issue of materials. It facilitates the physical verification of closing stock. Moreover, the entry is made on bin card after every receipt or issue of materials and the balance is adjusted. All discrepancies detected are adjusted both in bin card and also in the store ledger under proper authority.
A programme of continuous stocktaking follows a perpetual inventory. Both perpetual inventory and continuous stock are not one and the same. They have different meaning. Perpetual inventory means the system of records whereas continuous stock taking means the physical checking of those records with actual stocks.
Significance of Perpetual Inventory Valuation
The main point of perpetual inventory valuation is given below:
1. The stocktaking programme is divided into a number of functions like counting, weighing, measuring and listing.
2. These works are distributed among many members of valuation team.
3. A programme is laid down for periodic counts say weekly, once in ten days, fortnightly or monthly.
4. During verification, stores received but waited for inspection is not included in the regular stores items.
5. The observation of periodic counts is properly recorded in the bin card and stock verification sheet. The stock verification sheet is used for to record the results of stock verification. Both the balances ie the balance shown by bin card and the balance shown by actual verification are recorded in stock verification sheet.
Advantages of Perpetual Inventory Valuation
The following are the advantages of Perpetual Inventory Valuation.
1. A complete and reliable verification of materials is possible.
2. The working of any production centre need not be suspended for stock taking.
3. The preparation of P&L a/c and Balance Sheet is very easy with the help of closing stock value obtained from costing records.
4. Discrepancies can be readily detected and adjusted.
5. Suitable action may be taken to avoid discrepancies.
6. Materials are kept as per the stock levels prescribed for them.
7. If stocks are kept within the prescribed limits, minimum finance is enough to buy the materials.
8. There is no bottleneck in supply for production, loss due to deterioration, obsolescence etc.
9. Purchase requisition is made as soon as the stock reached the ordering level.
10. It creates a moral check upon the storekeeper.
11. Fire insurance claim is easily obtained with the help of reliable stock figures of costing records.
12. It helps in preparation of midyear accounts.
Disadvantages of Perpetual Inventory Valuation
The following are the disadvantages of Perpetual Inventory Valuation.
1. It is costly.
2. It requires more clerical work. Both bin card and stores ledgers should be maintained.
3. Physical verification is difficult if there is any discrepancy between bin card and stores ledger.
In spite of the disadvantages of perpetual inventory valuation, the follow up of the perpetual inventory valuation gives more benefits to the organization.